Definition of a house could change Hong Kong's landscape

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A recent judgment by the Court of Final Appeal on the definition of a "house" is expected to change the landscape of urban redevelopment and regeneration in Hong Kong.

The judgment involved Fully Profit (Asia), the owner of five contiguous lots on Nam Kok Road in Kowloon City. The lots were carved out from a parent lot that was subdivided. The developer wished to redevelop the five lots into a 26-storey building straddling all five lots. The development proposal was rejected by the Lands Department and that led to litigation as each lot was the subject to an individual government lease containing a restriction against building more than one house on the respective land.

Historically, many early government leases have such one house restrictive covenants, limiting every site’s development scale to not more than one house. However, the definition of a "house" has led to numerous arguments among developers and the Government. In light of that, the Lands Department issued Practice Note No. 3/2000 in 2000 with clear definition of what a "house" is:

One house is a building with one main entrance and one secondary entrance, together with means of escape (MoE) required under the Buildings Ordinance

The following cases would breach the "one house" restriction:

A multi-storey residential/commercial development with shops on the ground floor, each shop having its own separate access to and from the street

A terrace of town houses each with its own separate access

A joint development, having the characteristics of one house but constructed over two or more lots of which each is subject to an individual government lease containing one house restriction

On 13th May 2013, the Court of Final Appeal ruled in favour of the Lands Department. Moreover, the court stated that the definition of a "house" in the government lease "must have reference to those characteristics of the houses which were actually standing at the time the government leases were entered into". This statement has effectively changed the definition of a "house" stated in Practice Note No. 3/2000.

What are the implications of this judgment?

Redevelopment risks and cost for the developers will increase amid the cast of ambiguity to the market. The applicability of the Lands Department’s definition of a “house” in Practice Note No. 3/2000, which has been served as the basis of various urban redevelopment projects for the private sector for over a decade, is now virtually invalid. Without a new Practice Note at the time of writing, the judgment means now every lease has to be evaluated in its context with a historic approach instead of following a universal definition. This would immediately generate ambiguities and market arguments.

One would immediate question what the "characteristics" of a house are. According to the judgment, we know a 26-storey building is not permitted and the definition of a "house" must make reference to characteristics of the houses actually standing at the time when government leases were entered into. However, the judgment failed to point out which feature of a building could be defined as a characteristic. Is a characteristic identified in terms of design, height or orientation?

Another question on the judgment concerns the houses existing on the individual lot on the date of government lease.

What if it has been redeveloped and further redevelopment is contemplated now?

In such case, acquisition price and compensation offered to minority owners would be significantly lowered, with increased risks and costs on such redevelopment projects. Minority owners of such old buildings would hence see substantial value of their homes vaporised.

We expect the redevelopment value will be lowered. Developers who intend to redevelop lots with "one house" restrictions into a high-rise building could be demanded a lease modification by the Lands Department and hence a payment of land premium. Such redevelopments are thus less likely to be justified under Land (Compulsory Sale for Redevelopment) Ordinance, with lowered redevelopment potential on such land lots. This would also definitely impact valuation assumptions. One could imagine the huge drop of an old building’s value if it could only be redeveloped into a 5-storey building instead of 35-storey high rise and if it is still redevelopment justified.

It will also discourage site amalgamation and utilisation of land resources under the judgment. With limited buildable land resources available in Hong Kong, lowered land utilisation will further squeeze valuable potential residential supply.

It seems a contradiction to the primary objective of the current administration to boost residential supply. The Hong Kong Government is also likely to take a more conservative approach in the negotiation process and apply the ‘context’ historic approach in building plan submissions or before value assessment during land premium negotiations. The pace of urban regeneration will hence be further slowed amid lower redevelopment motivation in the private sector and longer land premium negotiations between private developers and the Lands Department.

The market would see a surge in such disputes and litigations, amid a lack of leading indication and official guidance. We consider that this judgment might constitute a lose-lose situation for the private sector and the Government amid dampened redevelopment motivation due to lowered potential and increased risks and costs, as well as the resulting slow urban regeneration.

In light of this, the Government should issue new guidelines regarding the revised definition of a "house" as soon as possible, or else the city might see such redevelopment projects stalled until the ambiguities are cleared by court judgment.